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December 2, 2011
Seattle may indeed have the bluest skies. At least this week.
Seen as a bright spot on the debt-weary U.S. horizon, the Pacific Northwest is in a promising recovery mode, mainly with steady job growth in the technology, life sciences and aerospace markets. Unlike Europe, where lack of financing and economic growth worries have put the squeeze on investment in commercial real estate, this region has optimism worth noting. Money, albeit not flowing, is filtering judiciously from lenders to commercial real estate investors.
In today’s commercial real estate landscape, many property owners and developers have had to adjust their thinking to get deals financed. Whether starting a ground-up construction project, refinancing or acquiring a commercial property, the lending environment has changed dramatically some would argue for the better.
Finding a comfort level
Aside from ground-up construction, the refinancing of existing commercial properties can get done if the borrower has equity and can provide a comfort level most lenders are looking for.
“If the property has a strong cash flow, the debt-to-equity ratio does not exceed 65 percent and the borrower has the business experience to match, there are multiple traditional lenders that will look at their loan needs,” said Jeff Gregg, a partner with New Foundations Financial. “There is still plenty of borrowing opportunity with traditional lenders, you just have to have a realistic deal.”
A realistic deal today on an investment property will look something like this: 65 percent LTV (loan to value) and at least five years left on the lease term with a credit-worthy tenant. The main concern most lenders have when lending on a cash-out refinance is, what are the proceeds being used for and will the current rental flow be sufficient to support the new debt service?
Derek Doke, a senior asset manager with Barclay’s Realty & Management Co., is getting ready to start construction on an 18,400-square-foot retail development in Issaquah. Doke says the bank is looking for the land to be the collateral and it needs to be debt free or subordinated and have enough equity in order for them to lend the $4.4 million needed to complete Issaquah Plaza 221.
“The financing terms are better than the terms we were quoted back in 2007, just before the financial melt-down,” said Doke. “Our project will be 75 percent pre-leased prior to breaking ground, which brought a lot more lenders to the table and gave them the comfort they were looking for.”
The lenders that have expressed interest in financing the new construction project are local credit unions, regional banks and private equity lenders.
Portland-based Umpqua Bank, a subsidiary of Umpqua Holdings Corp., recently launched a commercial real estate division to expand its commercial banking portfolio. Umpqua’s decision to form the new group, a confident move, was based on what the bank sees as an “improving market.”
John Swanson, senior vice president and manager of Umpqua’s Commercial Real Estate Division, says they’re doing deals and financing projects.
“We are processing construction and permanent loans, from industrial to retail to office, but primarily multifamily,” Swanson said. “Office building loans are small to medium, but that’s encouraging. We see opportunity in commercial real estate, so we are focusing on the income property financing needs of our customers.”
As to problem loans for Umpqua, the worst is behind them. “We are working the numbers down,” Swanson said. “We’ve had seven consecutive quarters of declining problem loans. Our non-performing asset ratio at the end of last quarter was 1.24 percent, which is the lowest in our region for our peer group.”
Financial protection needed
On the private lending front, the market has a steady pulse. Loans that are getting done with private lenders are in the 8.99 percent to 12.99 percent range, with 4 points needed for origination. Most of these loans mature within 24 months and carry no prepayment penalty. Again, the deal must have equity in the project in order to qualify for funding. All lenders, traditional or private, will not lend without some form of financial protection.
The financial protection is either first position within the property with ample room to liquidate and get paid, or the borrower(s) have the liquidity to satisfy the debt obligation. Lenders do not have room on their balance sheets to lend without solid security.
Seattle Funding Group President John Odegard said, “As a private-equity lender in today’s market, our focus is to work with seasoned borrowers that not only have a solid financial strategy for their borrowing needs, but the character to stick to the plan and meet the challenge.”
The days of leveraging one property to acquire another property and artificially inflating the value of property to get capital out to buy another property or highly leveraged cash-out refinance are over. The new norm is set, and there are plenty of lending options for properties that make sound business sense.
One developer that is concentrating on servicing and retaining the more than 130 investment properties it owns and manages is Harsch Properties. Rob Aigner, Harsch senior vice president and regional manager, sees Northwesterners “as optimistic at heart.”
“I’m glad to hear things are churning,” he said. “But for us, the only thing we’re buying right now is time.”
Barbara Travers, owner of BT Marketing, writes for and about the commercial real estate industry.
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